Almost anyone who's bought a house or taken out a mortgage in recent years knows the problems:
Lenders' "good-faith estimates" of loan and settlement fees provided at application too often are off the mark. Eleventh-hour surprise charges can add hundreds or even thousands of dollars to consumers' bottom-line costs at closing. No federal regulation requires strict adherence to the estimates.
The whole process of obtaining a mortgage lacks transparency, and loan features often are confusing to consumers or never are explained by lenders and brokers. That confusion, in turn, is a key reason why so many borrowers now find themselves locked into bad loans they never understood.
There is too much pressure to use lending, title and settlement service affiliates of the builder or realty broker. Builders, for example, sometimes dangle $10,000 to $30,000 worth of "incentives" in front of purchasers, but only if they'll use the builder's affiliated lender where mortgage rates and fees frequently are higher.
These and other problems are targets of a new, sweeping effort by federal authorities to reform the system with better disclosures and a crackdown on scammers. It's actually the Bush administration's second attempt to push through settlement improvements. An earlier effort in 2002 was hounded by lending, realty and title industry critics and eventually withdrawn.
The latest effort, outlined March 14 by Department of Housing and Urban Development officials, would transform the good-faith estimate into a comparison-shopping tool, force lenders to guarantee that their estimates are on the money, and walk borrowers step by step through closing procedures with a new consumer-friendly "script."
Among the key changes you can expect if the proposal is adopted after HUD's 60-day public comment period:
A new, nationally uniform four-page good-faith estimate that is laid out graphically to highlight all the key working features of a loan, including rate, points, origination fees, prepayment penalties, escrows and title insurance. The form then prompts applicants to take the lender's estimates and compare them with estimates provided by up to three competitors.
The new, easy-to-follow disclosures were tested by focus-group researchers who found that they enabled consumers to pick the "best" loan deal - lowest rate, lowest total fees and most advantageous terms - 90 percent of the time.
Strict limits - the first ever imposed - on variations between upfront cost estimates at the application stage and the final charges that appear on the settlement sheet.
All fees paid to mortgage brokers tied to the interest rate must be labeled as a "credit" to the borrower. This is intended to red-flag extra payments that brokers receive for steering applicants into higher note rate deals.
Incentive packages marketed by builders and others that effectively pressure consumers to use affiliated companies - but don't deliver true economic benefits or discounts - could violate the law under the new proposals.
The reform proposals were greeted with initial approval from major lending groups, but some critics said they will require extensive and costly changes in the mortgage and settlement services industries.
Washington attorney Phillip L. Schulman of K&L; Gates, who represents title, mortgage and settlement clients, called HUD's proposal "complicated, confusing and controversial," and predicted tough opposition from industry groups. Brian D. Montgomery, assistant secretary for housing, disagreed, saying "the timing is right. There is a lot of anguish out there" among homeowners saddled with confusing loans that the industry should not ignore.
UPDATE: Following publication of my column on the omission of VA loans from the economic stimulus package, Rep. Steve Buyer, R-Ind., ranking member of the House Veterans Affairs Committee, introduced a bill that would amend the legislation to raise VA loan limits to the same levels as those for FHA, Fannie Mae and Freddie Mac. Senate Veterans Affairs Committee Chairman Daniel K. Akaka, D-Hawaii, introduced legislation to do the same, but would extend the time limit on VA increases to Dec. 31, 2011, rather than Dec. 31, 2008, as in the stimulus law.
kenharney@earthlink.net.